K92 Mining Inc. (KNT) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the K92 Mining Conference Call to Discuss Their Updated Kainantu Gold Mine Integrated Development Plan. [Operator Instructions]. I would now like to turn the conference over to David Medilek, President and COO. Please go ahead.

Thank you, operator, and thanks everyone for attending K92 Mining's updated Kainantu Gold Mine Integrated Development Plan Conference Call. We hope you and your families are doing well. In addition to myself, we have on the line John Lewins, Chief Executive Officer and Director; and Justin Blanchet, Chief Financial Officer. I would also like to remind everyone that after the remarks from management, the call will be followed by Q&A session. As we will be making forward-looking statements during the call, please refer to the cautionary notes and risk disclosure in our MD&A and Slide 2 of the webcast presentation. Also, please bear in mind that all dollar amounts mentioned in the conference call are in United States dollars, unless otherwise noted. Now, I'll turn it over to John to provide an overview of the economic study.

Well, thank you, David, and welcome, everyone. We're delighted to announce yet another major milestone for K92, being the release of the Updated Integrated Development Plan, which has delivered a major improvement on the economics of the Kainantu Gold Mine, outlining a robust tier 1 asset. Before I discuss the specifics of the study, I'd like to begin by providing some high-level background information. The Updated Integrated Development Plan, also referred to as the Updated IDP, has an effective date of January 1, 2024. All forecasts begin from this date. The study supersedes the 2022 Integrated Development Plan, also referred to as the Prior IDP, which has an effective date of 1 January 2022. Similar to the Prior IDP, the Updated IDP evaluates 2 cases, a DFS Case and a PEA Case. The DFS Case evaluates a stage [Technical Difficulty] expansion to 1.2 million tonnes per annum through the construction of a standalone process plant, with the current Stage 2A plant idled. This is consistent with the Prior IDP DFS Case. The PEA Case evaluates the completion of 2 expansions: first, ramping up to the 1.2 million tonnes per annum through the construction of the new standalone process plant; then a second expansion to 1.8 million tonnes per annum by running the Stage 2A plant at 600,000 tonnes per annum and the Stage 3 new plant at 1.2 million tonnes per annum concurrently. This is referred to as a Stage 4 expansion. I note that the Updated IDP PEA Case throughput is 100,000 tonnes per annum higher than the Prior IDP, supported by the throughput performance, or outperformance, rather, of the actuals that we've achieved in the 2A plans since the last study. For the Updated IDP, we engaged several consulting firms, including H&S Consultants, GR Engineering Services, Entech, Metallurgical Management Services, WSP, ATC Williams, and EMM. I think it's important to note the construction for the expansion is well underway, and the mine declared commercial production almost 7 years ago. So, that provides excellent information to support the study. Now, in terms of the study highlights, I think it's fair to say we're very pleased with the results, beginning with the after-tax NPV5%, the DFS Case delivers an NPV of $680 million at $1,900 per ounce, or almost $1.1 billion at $2,500 per ounce, while the PEA Case recorded an even higher NPV of $2.3 billion at $1,900 an ounce, or $3.3 billion at $2,500 per ounce. Importantly, the growth capital remains low at $195 million and $201 million for the DFS Case and the PEA Case, respectively. Important to note also that $15 million of growth capital was spent in 2023 and is not included in this figure. After adding this to the growth CapEx presented, you'll see that the growth capital for the project remains closely aligned at $216 million for the PEA Case, with the $210 million CapEx, it was guided in 2024 operational guidance in February of this year. So for the DFS Case, grades are high, averaging 8.5 grams per tonne gold equivalent over a 7-year mine life, which for an underground operation supported by Measured and Indicated Resource is very substantial. This supports an average run rate of 303,000 ounces gold equivalent per annum. with a peak year of 319,000 ounces gold equivalent produced. Over the life of mine, costs are very low. The all-in sustaining cost is estimated at $920 per ounce gold equivalent on a co-product basis, or $665 per ounce gold on a net of by-product credit basis. For the PEA Case, the grade is also high, averaging 8.2 grams per tonne gold equivalent over a substantial 14-year mine life. Supporting a run rate of 414,000 ounces gold equivalent per annum, with a peak year of 485,000 ounces gold equivalent. Costs as expected are even lower for the PEA Case, benefiting from the higher throughput rate, with all-in sustaining cost of $822 per ounce gold equivalent on a core product basis, or $432 per ounce on net of by-product credits basis. Both cases have the commissioning of the Stage 3 plant expansion commencing in late Q2 '25. It's important to know that construction is currently tracking better than this. For the PEA Case, Stage 4 is planned to commence second half 2027. In terms of the key changes from the Prior IDP, a major change, which also is a big driver for updating the study, is the incorporation of our latest Mineral Resource reported in 2023, representing almost a full 2 years of additional exploration results. The updated Mineral Resource recorded as Measured and Indicated Resources increased by 14% to 2.6 million at 10 grams per tonne gold equivalent, while Inferred increased by 73% to 4.5 million ounces at 8.5 grams per tonne gold equivalent. This extended the terminal year for both cases, particularly for the PEA Case, which will be shown later in the presentation. So other key changes from the previous IDP include the following: a significant improvement in economics from the new concentrate offtake agreement with Trafigura, featuring improved metal payabilities, lower penalties, lower treatment and refining charges, and transport charges, all of which were better than the assumptions in the Prior IDP; a higher ultimate PEA Case throughput rate as previously discussed; an increase in commodity prices with the base case metal price of gold increasing to $1,900 per ounce from $1,600 per ounce to be more aligned with recent peer studies. Since the Prior IDP, inflationary pressure has been mild, which has resulted in a significant margin expansion. As our base case gold price assumption is now well below current spot, we've also presented numbers closer to spot at $2,500 per ounce. Cutoff grades have been slightly modified from the Prior IDP to achieve the optimal mine plan, with the PEA Case being reduced by 0.5 grams per tonne gold equivalent, and the DFS Case increased by 0.5 grams per tonne gold equivalent. The reduction in the cutoff grade for the PEA was due to an internal decision to have a longer life of mine at a comparable NPV, which we believe is in the best interest of the various stakeholders, particularly our local community and, of course, Papua New Guinea. Significant and improved changes made to the pastefill design, with the mining method and recovery method having only limited changes from the Prior IDP. Capital costs have been increased to reflect scope improvement changes and also general inflation over the last 2 years from the Prior IDP. Importantly, the capital cost remains closely aligned with our previous disclosed guidance of $210 million announced in Q1, as noted earlier. The following slide summarizes the comparison between Prior IDP and the Updated IDP for both the DFS and the PEA Cases. The key points on this slide are: firstly, after-tax NPV at $1,900 increased by 16% for the DFS Case and a very significant 73% for the PEA Case. Using prices closer to spot at $2,500 per ounce, NPV increased over 86% for the DFS Case and a very substantial 149% for the PEA Case. Secondly, the particularly significant increase to NPV in the PEA Case are driven by a combination of a major expansion to all-in sustaining cost margin of over 16% at $1,900 per ounce, or over 81% at $2,500 per ounce. And total ounces produced increased by 46%, which extended the final year of production by 5 years. Thirdly, for both cases, run rate and peak production remain fairly similar to the Prior IDP. In summary, the Updated IDP has delivered a major improvement in economics. Now, in terms of the mining method and mining plan, very similar to the Prior IDP. Avoca long hole open stoping utilizing wastefill will continue to be employed as it has been for several years until the pastefill comes online in the study in Q3, Q4 2025. Stoke shapes were generated using MSO at cutoffs of 3.5 gram per tonne and 4 gram per tonne gold equivalent for the DFS and PEA, respectively. Both cases leverage the existing twin incline infrastructure, which is already complete, and ore and waste passage, which are currently under development for highly efficient material movement, leveraging gravity. In terms of the dilution calculation, the parameters remain effectively unchanged from the Prior IDP, except as the text bolded, which outlines how we incorporate a more conservative assumptions when proximal to the hanging wall or footwall of the fault gouge through adding an additional 1 meter of dilution at 1.42 grams per tonne gold equivalent. I note, however, that we see the fault gouge as a major opportunity. It is well mineralized and has recorded some high-grade drill intersections through it. And once pastefill is commissioned, we see the potential to effectively mine it and ultimately extend the mine life. Overall dilution averaged 28.5% in the PEA and 27.8% in the DFS. In terms of the Stage 3 1.2 million tonne per annum processing flow sheet, only minor modifications to the plant design from the Prior IDP, and particularly around modifying the design to allow for efficient future expansions. The Stage 3 plant flowsheet is more modern and optimized when compared to the Stage 2A processing circuit currently operating. A major change on the Prior IDP is the pastefill system. The new design is considered lower risk in terms of both construction and operation. It involves producing a filter cake at the processing plant and backhauling it via the surface haulage trucks to a storage point near the 800 Portal and then transporting it to an underground pastefill plant via a dedicated fleet. The Prior IDP transported a thickened slurry from the process plant via a pipeline over 6.5 kilometers to the portal and involved 2 stages of tails thickening and extensive pumping from overland to underground, which we viewed as having high technical risk. Importantly, the Updated IDP underground pastefill is located near to the center of the deposit at approximately the 1200RL. This is important because it means that voids it fills below can be transported via gravity, while voids to fill above it is able to be reached with only 1 stage of pumping, thereby considerably lowering operating risk. Ultimately, the capital cost was similar and operating costs only moderately higher compared to the Prior IDP. In October, we awarded the river crossing and haulage road contract. This was done on a lump sum fixed price basis for the majority of the project, considerably derisking our capital cost. It's important to note that the capital cost for the river crossing is higher than the Prior IDP. However, the majority of capital cost increase has been offset through savings in other packages which have already been awarded, particularly in relation to electrical infrastructure. And this is a key reason why the growth capital remains closely aligned with our operational guidance reported in February this year. In relation to the haulage road upgrade, the scope is focused on 4 key areas: widening the road from approximately 9 meters to 14 meters, smoothing out the variance in gradient, reducing gradient in certain areas to improve road safety, and straightening the road in certain areas. This upgrade results in improved road haulage safety and efficiency in operating larger trucks. It is incorporated in sustaining capital and yields significant savings in operating costs over the life of mine. The haul road and river crossing upgrades are planned to be completed by the end of 2025. Now looking at the life of mine plan material movements. The DFS Case achieves run rate throughput in 2027, while operating at a fairly steady head grade for most of the mine plan. In terms of the PEA Case, it achieves Stage 3 run rate throughput of 1.2 million tonnes per annum in Q1 2027 and stage 4 run rate in Q4 2027. It operates for almost 8 years at maximum or near maximum throughput, a significant improvement from the 3 years at maximum throughput in the Prior IDP. Grades are below average in 2029 through 2031, and it's the focus of our exploration program to not only add mine life, but to bring in higher-grade feed sources to maximize production and cash flow during these years. And that, of course, is exploration Kora/Judd within the mine lease and outside of the mine lease, as well as other sources. It's important to note that the ramp-up makes allowance for the slower development rates and the impact of the mine shutdown in the first half of 2024. For both cases, the planned schedule is reaching 1.2 kilometers per month in May 2025. In terms of operating costs, costs are obviously very low. For the DFS Case, on a co-product basis, cash costs $694 per ounce gold equivalent, and all-in sustaining costs of $920 per ounce gold equivalent. Net of by-product credits, cash cost is $380 per ounce gold, and all-in sustaining, $665 per ounce gold. As for the PEA Case, on a co-product basis, cash costs are $633 per ounce gold equivalent, and all-in sustaining costs, $822 per ounce gold equivalent. Net of by-product credits, cash costs of $174 per ounce gold, and all-in sustaining costs of $432 per ounce gold. When drilling down into the operating costs per tonne, the DFS Case increased $29 per tonne processed, and the PEA Case increased by 6.6%, or $7.86 per tonne processed from the Prior IDP, which we see is a good outcome when factoring 2 years of cost inflation from the prior study. We see the potential to do better than the cost presented, particularly in terms of processing, but also with respect to G&A. In summary, we expect significant margin expansion from the Prior IDP. In terms of capital cost, on the left is a breakdown of the capital cost for the DFS Case, and on the right, the breakdown for the PEA case. Importantly, as noted earlier, we're pleased with how the capital costs are tracking. They remain closely aligned with our operational guidance disclosed in February. The largest packages, excluding the owner's team, approvals, and indirects, for both cases, are the process plant, paste plant, river crossing upgrade, and power station. It's important to highlight that of those 4 large packages, excluding the pastefill plant, the vast majority of the capital has been spent or committed and mostly awarded on a fixed price basis, significantly derisking the capital cost for K92. The process plant has 97% of capital either spent or committed and represents almost half of the total growth capital. The river crossing, 84% of the capital is either spent or committed. The power station, 88% of capital is either spent or committed. Overall, as at September 30, 2024, 63% of capital has been spent or committed, which following the award of the river crossing contract earlier this month, has increased to 68% of capital spent or committed. It's also important to note that both cases in the study are fully funded. K92 has a strong cash balance, ending Q2 with $71 million in cash plus $20 million in restricted cash that K92 has the ability to make unrestricted beginning 1st of January 2025. We have also access to significant amounts of liquidity through undrawn credit facilities. At the end of Q2, it was some $80 million. We drew down a further $20 million in July and have $60 million available to draw down on demand. There's also an additional $30 million of liquidity available through an accordion feature. In Q3, we delivered record production in a record gold price environment, resulting in a notable increase in our cash balance even after considerable capital expenditure for expansions during the quarter. Lastly, our commodity price downside is protected through the cost-effective purchase of put options, just over $2 million earlier this month, we purchased put option contracts for the next 9 months, covering 12,500 ounces of gold per month at 2,400 per ounce to protect against downside price risk. To be clear, it's not a hedge. We'll sell on spot if it's higher. This is insurance, and we retain full exposure to the upside of commodity price. In summary, our financial position and outlook is strong. I'd like to take a moment to show you some of our recent construction photos. The first image is a drone view of the process plants with the wet end of the plant in the foreground and the dry end in the background. As annotated, we note that a significant number of the long-lead items have already arrived on site, many of which arrived comfortably ahead of the construction schedule. In the foreground, you'll see that the structural and mechanical steelworks plus equipment has arrived on site for the contractor to complete those works. I can now show 2 more close-up photos of the process plant construction. On the left is the dry end of the plant where you'll see a significant process has already been made. In the foreground is the SAG and ball mills. The ball mill civils are 100% complete and ready for steelwork, mechanical, and piping. The SAG mill civils are nearing completion with a due date of mid-October, and I know these photos were taken almost a week ago. This zone is in the critical path and is tracking well. At the surge bin and reclaim, all raft slabs have been poured and are awaiting construction of walls. This area is not a critical path and is being worked on opportunistically. At the primary crusher, shutters, forms, and bracings are in place for the first pour of the wall lift. This zone is also not on the critical path. As shown in the right image, civils are complete at the tail thickener and structural steel erection has commenced. The filter press building raft slab is complete and awaiting shuttering and pouring of the walls. For the water services, the outer ring beam foundations have been poured with the inner ring beam to follow. Again, this area is not on the critical path and works are done opportunistically. For the flotation circuit, which is just outside of view, we've completed all of the civils, except for ground slabs for walking around the plant, which can be done at any time. The image on the left is another angle of the SAG and ball mill construction, highlighting the significant progress made to date, as noted in the prior slide. The right image is of the warehouse expansion upgrade, which we are completing in-house. This will increase the size of the warehouse by a factor of 3. Now in terms of life of mine production schedule, the DFS Case ramps up to run rate in 2027, which is also peak production of 319,000 ounces gold equivalent produced. The average run rate production is 303,000 ounces gold equivalent. During the ramp-up, costs also come down significantly, as you'd expect, with the co-product run rate all-in sustaining cost averaging $780 per ounce gold equivalent or $397 per ounce gold on a net of by-product credit basis. For the PEA Case, production achieves run rate in 2028, producing 440,000 ounces gold equivalent in that year with a run rate average of 414,000 ounces gold equivalent and a peak production of 485,000 ounces gold equivalent in 2034. Through our exploration programs, we see potential to bring in higher production years sooner, like the DFS during the ramp-up costs come down significantly with co-product run rate all-in sustaining costs averaging $805 per ounce gold equivalent or $338 per ounce gold on a net of by-product basis. Looking at after-tax cash flows at $1,900 an ounce, which, as you'll be aware, is considerably below the current spot prices, both cases generate significant amount of free cash flow. The run rate average for the DFS Case is $239 million per year, and the PEA Case is $316 million per year. Now if we look at $2,500 per ounce, the average run rate for the DFS Case is $328 million per year, and the PEA Case is $431 million per year. Since gold prices are going higher, and we'll probably get asked this question, we ran the cash flow analysis at a near spot price for gold, copper and silver, which outlined an average for the DFS Case of $346 million per year and for the PEA of $454 million per year. So I think in summary, the Kainantu Gold Mine is an exceptional project. In terms of the after-tax NPV5% sensitivity analysis, both the DFS Case and the PEA Case benefit immensely from higher gold prices. The DFS Case at $2,500 an ounce delivers an NPV5% of $1.1 billion, increasing to $1.5 billion at $3,100 an ounce. In the PEA Case, at $2,500 an ounce, delivers an NPV5% of $3.3 billion, increasing to $4.3 billion at $3,100 per ounce. For the PEA, I think it's important to note that the NPV at $1,900 is still considerably greater than our current market cap. And we believe this study highlights the significant deep value and rerating potential of K92. And importantly, the commissioning of the Stage 3 process plant is near term and will be funded. Lastly, I'd like to highlight that there are multiple high potential opportunities to improve upon the already robust economics of the Updated Integrated Development Plan. There are currently 11 rigs on the property, 6 underground, 5 on the surface, and we see multiple high potential opportunities, including, but not limited to, firstly, near-mine infrastructure targets to extend the non-resource Kora, Kora South, Kora Deeps, Judd, Judd South, Judd Deeps. Secondly, expand non-satellite deposits, particularly Arakompa, which we have increased the number of drill rigs by a factor of 4 during the course of the year, so we've got 4 now. Maniape is also very promising with historic highlights, including 49 meters at 4 grams per tonne and 7 meters at 22 grams per tonne. Thirdly, exploration for high-grade veins within development distance from Kora and Judd, including Karempe, Mati and Mesoan. And lastly, deliver better-than-forecast plant throughput and recovery. We see a major potential opportunity to exceed the design throughput of the Stage 3A plant demonstrated from the multiple throughput records that we've achieved over the last 12 months in the Stage 2A design. We also note that recent gold recovery outperformed versus the updated IDP parameters observed in Q2 and Q3 of this year, and that's also very encouraging. So with that, operator, we'd like to commence the Q&A session.

[Operator Instructions] Our first question is from Stephen Soock with Stifel.

John and team, congrats on getting the study out. Great to see the large increase in the resource base and rapidly growing. I just had a quick question around the change in the cutoff grade. Obviously, the cutoff grade went down for the PEA and slightly up for the DFS. Can you just talk a little bit about why the different directions for the 2 different levels of study?

Yes, Stephen, thanks for the question. I guess the real focus for us is on the PEA. That is our longer term. It is 14-year life. And part of it is about our engagement with the government and looking at our longer-term licensing and showing that the project has a long life. And that obviously, when we engage and look at how we renew our license is important. At the same time, we've looked at the numbers, and it does not compromise our NPV and return. So that really was the main driver to modify the PEA. In terms of DFS, there is a slight improvement for putting up the cutoff grade slightly. But the DFS is not really a focus for us, if you like, in the context of engagement and looking at what the project really looks like.

Sure. Fair enough. I guess, yes, the long-term picture here is more important on building out the right scale and planning to that level. I appreciate the answer. Just one more for me here. I guess, you went through where work is on site. I guess, what is some of the critical path items getting to that? I believe there is a May target date to have the Stage 3 kind of up and running and coming online. What's, I guess, critical stage now? And then how does that transition? The development is important, but is there anything else that's a focus?

Okay. So the commissioning of Stage 3 plant is late second quarter next year. And then we're looking effectively that by the end of the third quarter, the plant is commissioned and it's up and running at its design rate. Commissioning of the pastefill starts in the third quarter once we've got reasonably stable operations in the plant. You don't want to commission pastefill while you've got unstable operations in your plant. So first off, it's -- it would be then the critical path in terms of achieving the 1.2 moves in part to your pastefill or sustainably because paste is obviously important for us in enabling us to increase the number of working phases that we've got with paste, we can go bottom down and top up. So that's an important one for us. And we expect that the pastefill will take at least a quarter to get up and running. And normally, if you look at an underground mine, it takes around 6 months to get it working efficiently. Not so much the generation of the paste, more of the systems, procedures, infrastructure that you need to put it into your stopes and getting your cycle working. We've identified and you've mentioned, obviously, the development meters, and that is -- that's an important point for us getting our development meters up. I think we're pretty happy with where we're sitting right now this month. We've seen starting with a pretty significant improvement in part because we're starting to improve some of our infrastructure. Those things are coming through. But it's obviously key for us, and it's mentioned to be able to get that development meters up to 1,200, I think, the second quarter next year. So those would be our key things that are enabling us to do that, such as upgrade, et cetera, et cetera, but it's -- the measure is meters at the end of the day.

[Operator Instructions] The next question is from Alex Terentiew with Ventum Financial.